Cramer: Why the Rally in Stocks Is Real

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NEW YORK ( RealMoney) -- We used to call it "building a thesis." That means you take enough data from enough places and you put it all together and link it to the prospects of individual companies.

Here's what I am seeing. This morning, we got a terrific note from Frank Mitsch, my favorite chemical analyst, talking about chemicals prices coming down, notably for classic building block propylene. For Mitsch, that means cutting numbers for LyondellBasell Industries ( LYB). For me it means that the raw costs of so many products are at last showing the weakness that could lead to margin expansion -- not contraction -- for consumers of the polys and the ethyls, the basics of plastics.

Then we have Alcoa ( AA) talking down the price of raw aluminum, which was one of the reasons for the company's big earnings shortfall last night. Klaus Kleinfeld talks about the issues it causes for AA's earnings and calls out aggressive short selling of the metal itself as crucial to the decline in the commodity. I don't care about the Alcoa shortfall for the thesis as much as what it says about another building block for so many industries. We have already seen copper plummet drastically. The only metal you can switch to for conductivity now joins copper in the inability to keep prices from a free fall.

Then, we got a ho-hum crop report that signals that perhaps the grain complex, which had run up in anticipation of a less than bumper crop, may go back to levels that give important year-over-year price degradations. Grains! Alas, how much have they meant to the costs you have seen in the supermarket?

We know that copper has been weak. Steel's trying to find footing but the possibility of a spike up is not going to happen. Goldman has tried to call the bottom in coal pricing, but have we really seen one? The stocks have overshot but coal itself is stalled.

And then natural gas is down again. It has been stuck at $3.50 per gallon for so long that we have to begin to believe that, even with the fall heating season upon us, the glut is going to keep it down, allowing still one more break to the consumer.

Of course, oil's been stubborn and we see no sign of a Brent retreat, but we know that the price at the pump has fallen rather dramatically. We can only hope that by 2012 all the Rube Goldberg-like measures to get our light sweet crude to market -- the crude that is from the Bakken -- could impact refinery costs. They need light sweet crude to process from somewhere and have been buying Brent. If you get Bakken crude to them, then gasoline can go down again.

So, let's see, aluminum, grains, plastics, steel and natural gas are all in decline. What do we have? Let's tick them off:
  • 1. The possible end to the inflation spike in China.
  • We get the PPI and CPI in China on Thursday night. If that number, which had been in the high 6s, comes down a tad to 6 proper, then we will see China finally on hold in its endless tightening. Indonesia and Brazil have already cut rates. This is good news for the world's economic growth.
  • 2. We see a true break in the raw costs of autos.
  • Given that we see 13 million units being built -- something that Johnson Controls ( JCI) signals could continue in its upbeat analyst meeting today -- we could see Ford ( F) and General Motors ( GM) stop moaning about raw costs in 2012 and numbers could, at last, go higher not lower, especially if China comes back in line.
  • 3. Packaged goods companies are now going to have terrific margin expansion coming into 2012.
  • PepsiCo ( PEP), ConAgra ( CAG), General Mills ( GIS), Kraft ( KFT), Procter & Gamble ( PG), Colgate-Palmolive ( CL), Clorox ( CLX), all of which have put through price increases to offset their raw costs, are now going to have terrific margin expansion coming into 2012. What does that mean? Have you seen the explosion in profits from V.F. ( VFC) and Ralph Lauren ( RL) when cotton got crushed? The same thing could happen to all of these companies, as everything from the price of the wrap to the goods inside (grains and chemicals) to the shipping costs (gasoline) are coming down.

    If the thesis holds up, and I think it will, then we can estimate that the companies that report, instead of worrying about 2012 estimates coming down, will actually be able to guide up. That's a huge change at the margin because of, yes, the margins.

    None of this will offset a dramatic collapse of the plan for a plan to take care of the banking system in Europe and the notion of a disorderly Greek default. Right now, the market is thinking, collectively, that there will be no Lehman Brothers-type of event. That might be difficult if we see a domino default: Greece to Portugal to Italy to Spain. But I think that Germany and France are on the case and they are willing to sacrifice their credit ratings -- heck, we did! -- in order to make it so Europe is more earnings than systemic risk.

    That allows us to focus on earnings. And with that, I return to my thesis: If you have input costs coming down, the CEOs can sing a much better tune -- despite soon-to-be reduced European sales.

    What does all of this mean? That the increase in stock prices isn't fanciful. It makes sense.

    That might be enough to sustain this advance in itself or at least allow us to say that, indeed, we have seen the lows for the year and that the market can stay at the upper end of the S&P 500's range.

    In other words, it means a win.

    At the time of publication, Cramer was long AA, JCI.